United States Dollar Index gains ground above 99.50 as Middle East tensions, hot US PPI fuel demand

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.80 during the Asian trading hours on Friday. The DXY gathers strength amid uncertainty in the Middle East and a hot US inflation report. The preliminary reading of the Michigan Consumer Sentiment Index for June will be released later on Friday. 

Fox News reported on Friday that US forces intercepted and shot down two Iranian one-way attack drones near the Strait of Hormuz after Iran attempted to target commercial vessels transiting the waterway. 

This development came after US President Donald Trump said that he cancelled new military strikes on Iran on Thursday as negotiators were close to reaching an agreement on the final elements of a deal. Escalating tensions in the Middle East could boost the US Dollar against its rivals in the near term.

The US Bureau of Labor Statistics revealed on Thursday that US producer prices increased more than expected in May, leading to the highest level since November 2022. The US Producer Price Index (PPI) climbed 6.5% YoY in May, versus 5.7% prior, hotter than the market expectation of 6.4%. On a monthly basis, the PPI rose by 1.1% in May, above the market consensus of 0.7%.

Meanwhile, the core PPI rose by 4.9% on a yearly basis, matching April's print but coming in well below the estimations of 5.4%. Still, the current state of inflation is likely to keep the Federal Reserve (Fed) on the sidelines for the foreseeable future.

Markets are now pricing in a 43% odds of a quarter-point rate hike in December, up from just about 14% a month ago, according to the CME FedWatch tool.